Hindustan Petroleum Corporation Ltd & ... vs S S Engineers & Anr

National Company Law Appellate Tribunal Principal Bench, New Delhi COMPANY APPEAL (AT) (INSOLVENCY) No. 332 of 2020 (Arising out of Order dated 12th February, 2020 passed by National Company Law Tribunal, Kolkata Bench, Kolkata, in C.P. (IB) No.- 1422/KB/2018).

IN THE MATTER OF:

1. Hindustan Petroleum Corporation Ltd. Through Power of Attorney Holder Sh. Ramesh Chandra Bagh, Deputy General Manager - Delhi Retail Regional Office

Registered Office: Petroleum House, 17, Jamshedji Tata Road, Churchgate, Mumbai - 400020

And

North Zone Office: 7th Floor, Scope Minar, Laxmi Nagar District Centre, ...Appellant No. 1 Delhi - 110092.

2. Mr. Rakesh Misri Director (suspended) of HPCL Biofuels Ltd.

Registered Office: Hindustan Bhavan, 8, Shoorji Vallabhdas Marg, Mumbai - 400001.

And Residence at: Framroz Court, Flat No. 24, 5th Floor, Marine Drive, ...Appellant No. 2 Mumbai - 400020

Versus

1. M/s. S.S. Engineers A Sole Proprietorship concern through Sole Proprietor

Registered Office: J-179, MIDC, Bhosari, Pune - 411026 ...Respondent No. 1

2. HPCL Biofuels Ltd. Through Mr. Nitesh Kumar More, Interim Resolution Professional,

Registered Office: 18, -2-

Rabindra Sarani Poddar Court, Gate No. 1, 7th Floor, Room No. 701, Kolkata 700001

Also at: House No. 9, Shree Sadan, 1st Floor Patliputra Colony, Patna - 800013. ...Respondent No. 2

Appellants: Mr. Ramji Srinivasan, Sr. Advocate along with Mr. Ishaan Chakrabarty, Mr. Vivek Pandey, Mr. Shivkrit Rai, Mr. Abir Roy, Harshapreetha & Mr. T. Sundar Ramanathan, Advocates. Respondents: Mr. Ratnako Banerjee Sr. Advocate along with Mr. Avinash Das, Ms. Sakshi Kapoor, Mr. Ranjit Singh, Mr. Swatarup Banerjee, Ms. Pooja Sethi & Mr. Amar Singh, Advocates for R-1.

JUDGEMENT

[Per; Shreesha Merla, Member (T)]

1. Aggrieved by the Order dated 12.02.2020 in CP (IB) No.

1422/KB/2018 passed by the Learned Adjudicating Authority (National

Company Law Tribunal, Kolkata Bench, Kolkata), 'M/s. Hindustan Petroleum

Corporation Ltd.', preferred this Appeal under Section 61 of the Insolvency

and Bankruptcy Code, 2016, (hereinafter referred to as the 'Code'). By the

Impugned Order, the Learned Adjudicating Authority has allowed the

Application preferred by 'M/s. S.S. Engineers & Anr.' (hereinafter referred to

as the 'Respondent/'Operational Creditor'), and observed as follows:

"16. Thus, considering the legal framework as a whole, i.e., provisions of section 3(23) along with other provisions of the IBC, 2016, in our considered view, in the present context, the term "person" in our considered view would include sole proprietorship firm as well being eligible to file petition under section 7 or 9 under IBC 2016. We further observe that these aspects and legal provisions were not argued in cases relied on by the Corporate Debtor while deciding the issue as regards to maintainability of the application

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by the sole proprietorship firm, hence, we most humbly submit that such decisions are not applicable.

17. As regards the pre-existing dispute, we have gone through all the facts stated by the Corporate Debtor but having regard to the quantum of claim in respect of supplies order, in our considered view, the amount of disputed claim due and payable will be more than Rs. One lakh in any case. Hence, such claims do not help the case of Corporate Debtor in substantial manner. Having said so, we would further refer to the provisional statement attached with the letter of the Corporate Debtor dated June 25, 2014 copy of which has been placed at Page 1779 of Vol. 10 of the paper book to find as to what is the factual position as per the stand of Corporate Debtor on various issues. As per this provisional statement, the total purchase order value has been shown as Rs. 3818.72 lakhs. There have been several deductions including for services provided by Corporate Debtor to the Operational Creditor in the execution of the contract, entry tax, TDS, WCD, payment to parties/ payment to Operational Creditor by the Corporate Debtor / sub-

vendors and subcontractors/vendors of the Operational Creditor. These are normal deductions as per business practice and terms of contract. However, it is noteworthy that Liquidated Damage @ 5% amounting to Rs. 190.94 lakhs, Performance Bank Guarantee to the tune of 673.6 lakhs, work claim of Rs. 352.00 lakhs for boiler house extension P.O. finalisation and additional work 71 lakh have also been considered. The net effect has been worked out by Corporate Debtor as Rs. 500 lakhs receivable from the Operational Creditor. If the boiler house extension and additional work are ignored, the amount recoverable from the Operational Creditor gets reduced to 63.13 lakhs. Further, if the amount retained for Performance Bank Guarantee is taken into consideration, then the amount payable to Operational Creditor works out at Rs. 610.23 lakhs (i.e., 673-63.13). As noted earlier, L.D. Is applicable @5% amounting to Rs. 190,94 lakhs has already been deducted. Further, amount of Rs. 400.55 lakhs in respect of Purchase Orders issued at the risk and cost of the vendor have also been deducted. Thus, all recoveries for non-performance/default has been considered and therefore, amount of Performance Bank Guarantee minus recovery i.e., 610.23 lakhs at least becomes payable by Corporate Debtor to the

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Operational Creditor. As an adjudicating authority in the proceedings, we are not suppose to do this kind of working, but to find out the genuineness of the claim of pre-existing dispute, and amount of outstanding debt, it was necessary in the facts and circumstances of the case, hence, it has been so analysed on the basis of the provisional statement prepared and filed by the Corporate Debtor itself. At the cost of repetition, we again state that this statement takes into consideration all these disputes raised by the Corporate Debtor, hence, the amount payable by the Corporate Debtor remains in positive which is more than one lakh ultimately that too when we have considered the project as a whole against the claim of Operational Creditor of undisputed dues of supply portion only. We have also gone through the emails which have been taken into consideration while preparing this provisional statement. Hence, on the basis of material on record, it cannot be said that any other dispute remains to be considered. Apart from this, the fact which is crucial to note is that the Corporate Debtor has awarded new work orders to the Operational Creditor subsequently which means that all the disputes relating to this contract had been considered/resolved and this fact has remained undisputed. Further, Form "C"s have been issued as late as up to March 2018. We further make it clear that we have analysed the provisional statement with limited objective of admissibility of this application and this analysis cannot be considered as expression of opinion on the amount of claim in any manner which may be actually due and payable."

(Emphasis Supplied)

2. Submissions of Learned Counsel appearing on behalf of the

Appellant:

 It is strenuously argued that the Application for initiation of CIRP is

'barred by Limitation' as the last payment was made by the 'Corporate

Debtor' on 07.11.2013, the Demand Notices were issued on

30.08.2017 and on 25.07.2018 and the Application was filed on

05.10.2018.

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 The various Form-C's issued by the 'Corporate Debtor' would not

amount to an 'Acknowledgement of Debt' so as to extend the period of

limitation, as the Form-C's were issued for the purpose of paying

concessional rate of tax under CST Act, 1956 and the rules made

therein. Form-C does not meet the requirement of an

'Acknowledgement of Debt' in writing for the purpose of Section 18 of

the Limitation Act, 1963 as there is no conscious admission of the

liability to pay and the commitment towards the liability. In support of

this contention, the Learned Counsel placed reliance on the following

Judgements:

o 'Reunion Electrical Manufacturers (P) Ltd.' (2006) 70 SCL 52

(Bom);

o 'Taipack Limited' Vs. 'Ram Kishore Nagar Mal', 2007 (3) ARB LR

402 (Delhi)

o 'Alliance Paints and Varnish Works Pvt. Ltd.' Vs. 'Hari Kishan

Gupta' (2010) 168 DLT 591

o 'Zion Steel Limited' Vs. 'Subtleweigh Electric (India) Pvt. Ltd.'

(2014) 1 HCC (Cal) 284.

 The project was a turnkey project and the bifurcation given in the said

Purchase Order was for the purpose of calculation of tax and not

otherwise. The said Purchase Orders were under the same tender and

the disputes which arose were under the same tender. The

Adjudicating Authority failed to take note that the Purchase Order and

the tender documents provide for a turnkey based project.

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 It is contended that there is a 'Pre-Existing Dispute' between the

parties as the first Respondent failed to honour the terms of the

Purchase Order and its terms and conditions and delayed the supply

of material, failed to deploy completion contractors, delayed the

execution of the project and rendered inferior and substandard quality

of work and finally withdrew from the Project abandoning the site as

can be seen from the correspondence and the Minutes of the Meetings

held with the 'Operational Creditor'. In support of his contention, the

Learned Counsel placed reliance on Annexure 8 and Annexures 16-93.

 It is on account of abandoning of the project by the 'Operational

Creditor' that the 'Corporate Debtor' had suffered huge losses and

made excess payments to the sub-contractors. The 'Corporate Debtor'

had cleared all outstanding dues in a timely manner as was agreed to

by the first Respondent in the Minutes of the Meetings.

 The 'Corporate Debtor' invoked the Arbitration clause seeking to refer

the 'disputes for adjudication by an Arbitrator'. Two Demand Notices

were issued by the first Respondent one on 30.08.2017 and the other

on 25.07.2018, both raised a demand for payment in relation to the

very same 8 Purchase Orders seen in the letter dated 09.07.2016. The

Learned Counsel placed reliance on the ratio of Hon'ble Supreme

Court in the following Judgments:

o 'Mobilox Innovations (P) Ltd.' Vs. 'Kirusa Software (P) Ltd.' (2018)

1 SCC 353.

o 'K. Kishan' Vs. 'Vijay Nirman Co. (P) Ltd.' (2018) 17 SCC 662.

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 The Application for initiation of CIRP is not properly authorised as the

business of the sole proprietorship is not a legal entity.

 The 'Corporate Debtor' acts as the extended limb of the Central

Government and cannot be put under CIRP.

3. Submissions of Learned Counsel appearing on behalf of the

Respondent/'Operational Creditor':

 Learned Counsel strenuously contended that the work is divided into

three parts (a) supply (b) works contract (c) services. He contended

that the C Forms/Sales Tax declaration were given for the entire

supply portions and this amounts to liability and admission as

stipulated under Section 18 of the Limitation Act, 1963.

 Learned Counsel placed reliance on the Judgement of the Hon'ble

High Court of Andhra Pradesh in 'M/s. Electroflame Ltd.

Hyderabad' Vs. 'M/s. Mittal Iron Foundry Private Limited' 1998

(2) APLJ 6 (HC) wherein it was held that submission of Form-C is a

significant element itself as the same signifies a jural relationship

between the parties. He submitted that when liability is shown in the

Balance Sheet, it itself is a clear 'Acknowledgement of Debt' by the

Company and has the effect of extending the period of limitation under

Section 18 of the Limitation Act, 1963. It is also contended that the

Balance Sheets of the 'Corporate Debtor' has not been placed on

record.

 The tender conditions provide that C Forms will have to be issued for

the supply portion. The Learned Counsel drew our attention to the 8

Purchase Orders to show that there is a clear breakup of the 'supply'

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portion, 'works contract' portion and the 'services' portion and further

submitted that the issuance of C Forms from the period 11.03.2015 to

27.03.2018 is an act of admission of the supply of machinery as also

of their value and amounts to 'part payment' of the total consideration

and hence, the Application is not 'barred by Limitation'.

 It is contended that there is no 'Pre-Existing Dispute' and the letters

relied upon by the Appellants to urge 'Pre-Existing Disputes' are all

prior to the letter dated 25.06.2014 in which an unascertained sum is

claimed as damages by the 'Corporate Debtor'. In the provisional

Financial Statement given by the 'Corporate Debtor', there is a clear

admission of debt owed to the 'Operational Creditor'. The

unascertained sum which is sought to be adjusted against the bill

amount is a counter claim for alleged damages and cannot be adjusted

against the admitted claim. Further, there is no defense as against the

sum which has been retained against the Purchase Orders.

 The Arbitration Notice issued on 09.07.2016 was for the recovery of

the amount as there was an Arbitration clause in the tender and does

not in any manner bar any initiation of Insolvency Proceedings. The

'Corporate Debtor' did not reply to the Notice dated 09.07.2016. There

is also no Reply to the first Notice under Section 8 of the Code, which

is dated 30.08.2017. The second Notice was replied to by letter dated

07.08.2018, in which counter claim for damages was made which is

wholly a malafide and a frivolous attempt by the 'Corporate Debtor'

and is also otherwise 'barred by Limitation'.

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Assessment:

4. A perusal of the 'Tender Enquiry' dated 27.06.2012, the 'Instructions

to bidders', 'General Conditions of Contract' and 'Special Conditions of

Contract', show that the tender is for 'design, engineering, manufacture,

procurement, supply, transportation to site, transit and storage, insurance,

storing at site, project management, civil work, mechanical works, electrical

works, instrumentation work, erection, installation, interfacing, testing,

commissioning, performance testing, putting into successful commercial

operation and handing over additional equipment goods, and material

centrifugal section including civil foundation for enhancing the boiling house

capacity from 1750 TCD to 3750 TCD on Lumpsum Turnkey Basis including

civil foundation work'. It is an admitted fact that the 'Operational Creditor'

was awarded another work on 13.06.2013 and on 08.08.2013 all on a

'lumpsum turnkey basis'.

5. It is seen from the subject matter of the tender that the execution of

the Project is on a lumpsum turnkey basis, whereby and whereunder the

contractor was responsible for the entire execution of the work in

accordance with the specifications and to the satisfaction of the 'Corporate

Debtor'. Clause 5.1 of the General Condition of Contract stipulates that 'as

soon as the work is completed in all respects, the contractor shall give Notice

of such completion to the site in charge and within 30 days of receipt of

such Notice, the site in charge shall inspect the work and furnish the

contractor with a certificate of completion indicating, the defects, if any, and

the date of completion'.

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6. For better understanding of the case, the Purchase Order dated

15.10.2012 (Annexure-2) is reproduced as hereunder:

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7. It is seen from the Purchase Order that there is a detailed breakup, as

stated by the Counsel for the first Respondent, of the 'supply' portion, 'works

contract' portion and 'services' portion. However, the fact remains that the

description of the tender read together with the General Conditions of the

Contract and Special Conditions of the Contract establish that it is a

lumpsum turnkey based contract.

8. It is the case of the 'Corporate Debtor' that the 'Operational Creditor'

had delayed the performance of his obligations and the same was brought to

the Notice of the 'Operational Creditor' vide Letter dated 11.08.2013. For

better understanding of the case, the subject letter dated 11.08.2013 is

reproduced as hereunder:

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9. The issue raised in this Appeal needs to be adjudicated on the

touchstone of the ratio laid down by the Hon'ble Supreme Court in a catena

of Judgements with respect to 'Pre-Existing Dispute'.

10. It will be relevant to refer to para 51 of the Judgment of the Hon'ble

Apex Court in 'Mobilox Innovations (P) Ltd.' Vs. 'Kirusa Software (P)

Ltd.' (2018) 1 SCC 353:

"51. It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(2)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the "'existence" of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is whether there is a plausible contention which requires further investigation and that the "dispute" is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application."

11. In the instant case, the correspondence on record evidences that there

indeed was a delay in the performance of the Contract and the final Notice

was issued on 01.12.2013 by the 'Corporate Debtor' to complete the works.

The letter dated 02.01.2014 is detailed as follows:

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(Emphasis Supplied)

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12. From the aforenoted letter dated 02.01.2014, the Appellant/'Corporate

Debtor' raised several issues summarized as hereunder:

 Erection and commissioning of electric power was not done.

 No monthly Progress Report was submitted in violation of Clause 8.4.3

of the Purchase Order.

 Not met a single deadline of completion.

 On account of delay in execution, the 'Corporate Debtor' had to start

their own mills with old equipment and lesser capacity on 23.12.2013

and on 24.12.2013 respectively.

 On account of incomplete supply of equipment, the 'Corporate Debtor'

was forced to get the same completed by making direct payments, in

gross violation of the terms of the contracts.

 Non-supply of 70% of SS Tubes of evaporator and sets and pans.

 Extreme poor quality of the equipment supplied by the 'Operational

Creditor' namely valves, pumps etc.

 Poor supervision, poor coordination, poor quality of erection work in

violation of clause 15.1.2 of the terms and conditions of the contract.

 Centrifugal machines supplied are still not commissioned and no

follow up on behalf of the 'Operational Creditor'.

 Inadequate manpower used for electrical erection work. Raw juice

pumps supplied are not working at both the sides.

 Condenser nozzles are not fitted properly at both the locations.

 Violation of clause 1.2 of SCC in terms of non-supply of instrument

cables from MCC to DLS.

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 Incomplete erection of evaporator sets, vertical crystallizers and DCH

sections.

 Lapse of more than one year of award of contract for new equipment

and still there are several defects and defaults. Hence, clause 23 of

'owners right to withhold payment' has been invoked.

13. As against these disputes raised, the first Respondent/'Operational

Creditor' stated in their Reply that despite several requests and reminder

letters from 2013 to 2017, the 'Corporate Debtor', instead of paying the due

amounts, raised these baseless allegations and disputes. It is the case of the

'Operational Creditor' that there is no 'Existence of Dispute' prior to the

issuance of Demand Notice. In their email dated 08.04.2013, in relation to

the Minutes of the Meeting, the 'Operational Creditor' had clarified that work

progress is subject to prompt payments. July 31, 2013 was decided as the

commissioning date subject to immediate and prompt payment made by the

'Corporate Debtor'. The 'Operational Creditor' had always shown their

willingness to commission and perform their obligations and their senior

personnel were stationed at the site of the 'Corporate Debtor' and additional

staff always visited from time to time. It was only because of pendency of

payment of the dues that the 'Operational Creditor' had faced difficulties in

executing the ongoing Project. The 'Corporate Debtor' was making ad hoc

payments but not as per the bills raised. The Learned Counsel relied on the

emails dated October 12, 2013, November 2, 2013 and November 14, 2013

to buttress his contention that despite repeated reminders, the 'Corporate

Debtor' never responded. The 'Corporate Debtor' engaged contractors on

their own to commission the plant after the receipt of all the supplied

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material from the 'Operational Creditor' without their approval or consent

and made exorbitant payments to such contractors. No consent has been

given to the 'Corporate Debtor' to make such payments to the subject

contractors directly and therefore such an act was at their own risk. Letters

dated May 05th, 2014 and May 07th, 2014 were addressed to the 'Corporate

Debtor' seeking supporting documentation of the work undertaken by the

contractors engaged by the 'Corporate Debtor', but there was no response.

The 'Operational Creditor' only accepted the debit of Rs.1,25,80,121/-

against 5% entry tax which was also accordingly been deducted in

calculating the principal amount of 'Operational Debt' of Rs.13.69 Crores.

Except these debits, none of the debits have been accepted or consented to

by the 'Operational Creditor'. It is also their case that fraudulent debit notes

were raised by the 'Corporate Debtor as Purchase Orders were placed with

Power Former Engineer for repairs of centrifugal machine, which was never

part of the 'scope of work' of the first Respondent.

14. It is strenuously contended by the Learned Counsel that the conduct

of the 'Corporate Debtor' in awarding fresh Purchase Order in August 2013

at the fag end of the completion of the previous 6 orders, while at the same

time, complaining against their performance, is self-contradictory and goes

to show the malafide intention of the 'Corporate Debtor'. It is the case of the

'Operational Creditor' that all equipment supplied was of good quality and all

the valves which were procured were from a vendor mandated by the

'Corporate Debtor' only. If the 'Corporate Debtor' was dissatisfied with the

quality of work or substandard material supplied, there are no substantial

reasons as to why new contracts were awarded at the fag end of the previous

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6 contracts. 87% of the material and services were already completed as per

the billing breakup and therefore the question of short supply or purchase of

additional material by the 'Corporate Debtor' does not arise. It is also

vehemently contended that the 'Operational Creditor' was constrained to

stop supply to the 'Corporate Debtor' only on account of failure of payments

of pending principal dues which amounts to more than Rs.13 Crores. The

'Corporate Debtor' continued to raise various debit notes unilaterally without

any supporting documentation, for which the 'Operational Creditor' cannot

be held responsible.

15. The 'Operational Creditor' vide email dated 02.02.2014 i.e. one month

after the aforenoted letter sought for release of payment. Once again the

'Corporate Debtor' on 04.02.2014 and on 28.02.2014 reiterated the poor

performance of the 'Operational Creditor' on account of which huge losses

were incurred.

16. On 29.03.2014, it is the case of the 'Corporate Debtor' that the

'Operational Creditor' had abandoned the site and therefore, the 'Corporate

Debtor' had to take over the Project and make all the relevant payments to

the vendor. The material on record shows that on 28.04.2014 another letter

was addressed by the 'Corporate Debtor' to the 'Operational Creditor' citing

all the inadequacies in the performance of the contract. On 19.06.2014, the

'Operational Creditor' once again raised the payment for Rs.13.34 Crores.

17. Section 8 of the Code reads as hereunder:

8. Insolvency resolution by operational creditor.--(1) An operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the

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default to the corporate debtor in such form and manner as may be prescribed.

(2) The corporate debtor shall, within a period of ten days of the receipt of the demand notice or copy of the invoice mentioned in sub-section (1) bring to the notice of the operational creditor--

(a) existence of a dispute, [if any, or] record of the pendency of the suit or arbitration proceedings filed before the receipt of such notice or invoice in relation to such dispute;

(b) the [payment] of unpaid operational debt--

(i) by sending an attested copy of the record of electronic transfer of the unpaid amount from the bank account of the corporate debtor; or

(ii) by sending an attested copy of record that the operational creditor has encashed a cheque issued by the corporate debtor.

Explanation.--For the purposes of this section, a "demand notice" means a notice served by an operational creditor to the corporate debtor demanding [payment] of the operational debt in respect of which the default has occurred.

18. It is clear from Section 8(2)(a) that 'Existence of a Dispute', (if any, or)

record of the pendency of the Suit or Arbitration Proceeding filed before the

receipt of such Notice or invoice in relation to such dispute should be

brought to the notice of the 'Operational Creditor' within 10 days of receipt

of the Demand Notice. In this case, the Demand Notice under Section 8 of

the Code claiming a sum of Rs.13.69 Crores was issued on 25.07.2018. On

07.08.2018, the 'Corporate Debtor' responded to the Demand Notice

referring to various communications, Minutes of the Meeting and submitted

that there was a 'Pre-Existing Dispute'. Though we are conscious of the fact

that the 'Corporate Debtor' responded to the Demand Notice belatedly, the

fact remains that the Appellant raised the issue of 'Existence of a Dispute' in

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their Reply filed before the Adjudicating Authority with all the supporting

documents.

19. It is pertinent to note that on 09.07.2016, 'prior to the issuance of the

Demand Notice under Section 8 of the Code', the 'Operational Creditor'

invoked Arbitration pursuant to the 8 project orders issued by the

'Corporate Debtor', which itself substantiates the 'Existence of a Dispute'. In

the 'Notice' invoking Arbitration, the 'Operational Creditor' has stated that

there is an outstanding of Rs.18,12,21,452/- and has further stated that

they are ready to settle the disputes through Arbitration. A brief perusal of

the documents on record evidence that the 'Operational Creditor' admitted

that the contract was on lumpsum turnkey basis and stated in the

Arbitration 'Notice' that the 'Corporate Debtor' had raised issues relating to

non-adherence of the terms of the contract.

20. The Hon'ble Apex Court in 'K. Kishan' Vs. 'Vijay Nirman Co. (P) Ltd.'

(2018) 17 SCC 662, has observed as follows:

"19. After referring to Section 8, the judgment in Mobilox Innovations case went on to hold that what is important is that the existence of the dispute and/or a suit or arbitration proceeding must be pre-existing i.e. it must exist before the receipt of the demand notice or invoice, as the case may be.

20. The adjudicating authority, therefore, when examining an application under Section 9 of the Code, will have to determine the following: (Mobilox Innovations case, SCC p. 394, para 34)

"34. ... (i) Whether there is an "'operational debt"

as defined exceeding Rs 1 lakh? (See Section 4 of the Act.)

(ii) Whether the documentary evidence furnished with the application shows that the aforesaid

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debt is due and payable and has not yet been paid?

and

(iii) Whether there is existence of a dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of the demand notice of the unpaid operational debt in relation to such dispute?

If any one of the aforesaid conditions is lacking, the application would have to be rejected. Apart from the above, the adjudicating authority must follow the mandate of Section 9, as outlined above, and in particular the mandate of Section 9(5), and admit or reject the application, as the case may be depending upon the factors mentioned in Section 9(5).

21. In para 38, this Court cautioned: (Mobilor Innovations case, SCC

"38.... We have also seen that one of the objects of the Code qua operational debts is to ensure that the amount of such debts, which is usually smaller than that of financial debts, does not enable operational creditors to put the corporate debtor into the insolvency resolution process prematurely or initiate the process for extraneous considerations. It is for this reason that it is enough that a dispute exists between the parties."

Finally, the law was summed up as follows: (SCC p. 403, para 51)

"51. It is clear, therefore, that once the operational creditor has filed an application, which is otherwise complete, the adjudicating authority must reject the application under Section 9(5)(ii)(d) if notice of dispute has been received by the operational creditor or there is a record of dispute in the information utility. It is clear that such notice must bring to the notice of the operational creditor the "existence" of a dispute or the fact that a suit or arbitration proceeding relating to a dispute is pending between the parties. Therefore, all that the adjudicating authority is to see at this stage is

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whether there is a plausible contention which requires further investigation and that the "dispute" is not a patently feeble legal argument or an assertion of fact unsupported by evidence. It is important to separate the grain from the chaff and to reject a spurious defence which is mere bluster. However, in doing so, the Court does not need to be satisfied that the defence is likely to succeed. The Court does not at this stage examine the merits of the dispute except to the extent indicated above. So long as a dispute truly exists in fact and is not spurious, hypothetical or illusory, the adjudicating authority has to reject the application."

22. Following this judgment, it becomes clear that operational creditors cannot use the Insolvency Code either prematurely or for extraneous considerations or as a substitute for debt enforcement procedures. The alarming result of an operational debt contained in an arbitral award for a small amount of say, two lakhs of rupees, cannot possibly jeopardise an otherwise solvent company worth several crores of rupees. Such a company would be well within its rights to state that it is challenging the arbitral award passed against it, and the mere factum of challenge would be sufficient to state that it disputes the award. Such a case would clearly come within para 38 of Mobilox Innovations, being a case of a pre-existing ongoing dispute between the parties. The Code cannot be used in terrorem to extract this sum of money of rupees two lakhs even though it may not be finally payable as adjudication proceedings in respect thereto are still pending. We repeat that the object of the Code, at least insofar as operational creditors are concerned, is to put the insolvency process against a corporate debtor only in clear cases where a real dispute between the parties as to the debt owed does not exist..................................................................

27. We repeat with emphasis that under our Code, insofar as an operational debt is concerned, all that has to be seen is whether the said debt can be said to be disputed, and we have no doubt in stating that the filing of a Section 34 petition against an arbitral award shows that a pre-existing dispute which culminates at the first stage of the proceedings in an award, continues even after the award, at least till the final adjudicatory process under Sections 34 and 37 has taken place."

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21. The facts of the present case are being examined in the light of the law

laid down by the Hon'ble Supreme Court, though the Learned Counsel for

the 'Operational Creditor' has strenuously contended that the issuance of

further work orders and the Notice issued by the 'Operational Creditor'

invoking Arbitration does not amount to 'Existence of a Dispute', the nature

of communication on record with rival contentions clarify the 'Existence of a

Dispute' between the parties prior to issuance of the Demand Notice. It has

been time and again held that 'it is enough that a 'dispute exists' between

the parties.

22. The communication between the parties as noted in para 10 read

together with the Arbitration invoked by the 'Operational Creditor', we are of

the considered view that there is an 'Existence of a Dispute' between the

parties which is a genuine dispute and not a spurious, patently feeble legal

argument or an assertion of fact unsupported by evidence. Therefore, we are

of the opinion that the ratio laid down by the Hon'ble Apex Court in the

aforenoted 'Mobilox Innovations (P) Ltd.' (Supra) and 'K. Kishan' (Supra)

is squarely applicable to the facts of this case.

23. It is the case of the 'Operational Creditor' that the 'Corporate Debtor'

has not filed their Balance Sheets and has categorically raised this issue in

their Reply to the Appeal. We are also conscious of the fact that the

'Corporate Debtor' has not filed the Balance Sheets to examine the question

of limitation referring to the observations of the Hon'ble Supreme Court in

'Asset Reconstruction Company (India) Limited' Vs. 'Bishal Jaiswal

and Ors.' AIR 2021 SC 5249 and in 'Dena Bank' Vs. C. Shivakumar

Reddy and Ors.' (2021) 167 SCL 453 (SC). Though both sides have

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strenuously argued regarding whether 'C' Forms, issued in

acknowledgement of completion of sale, would amount to 'Acknowledgement

of Debt' as envisaged under Section 18 of the Limitation Act, 1963, we do

not wish at this juncture, to go into those aspects as we are of the

considered view that there is a 'Pre-Existing Dispute' between the parties

and we allow the Appeal.

24. This Appeal is allowed and the Order of the Adjudicating Authority

dated 12.02.2020 is set aside. The Adjudicating Authority will now close the

proceedings. The Corporate Debtor is released from all rigours of law and is

allowed to function independently through its Board of Directors with

immediate effect.

25. The Registry is directed to upload the Judgement on the website of

this Tribunal and send the copy of this Judgement to the Learned

Adjudicating Authority (National Company Law Tribunal, Kolkata Bench)

forthwith.

[Justice Anant Bijay Singh] Member (Judicial)

[Ms. Shreesha Merla] Member (Technical)

NEW DELHI 10th January, 2022

ha

Company Appeal (AT) (Insolvency) No. 332 of 2020